 Good afternoon, everybody. I hope you guys all had a really awesome Thanksgiving and I got lots of turkey. Thank you for joining us today on another condo insider. Today, we have with us Bank of Hawaii's finance and leasing programs. We have with us today Randy Au and Eric Fairfax, both with vice presidents with Bank of Hawaii. So they're going to talk about financing and also their lease program that might be really beneficial to a lot of condos that are looking to finance some upcoming projects. So I know a lot of the condos are aging and they're doing pipe repairs and replacements. And I mean, I know that's one of the big ticket in addition to a lot of the other normal maintenance and repair stuff that we have to do. So we wanted to bring them on board, give us a little insights as to some of the programs that they have available that can help condos and also the qualifications for condos in order to meet some of these guidelines, in order to guidelines as far as what Bank of Hawaii requires. So I'm going to introduce. We have Randy and then we have Eric. Thank you guys for being here today. Thank you very much for having us, Relyne. My name is Eric Fairfax and presenting with me today as Relyne mentioned is Randy Au. And together, we're part of a team at Bank of Hawaii that specializes in loans and leases to condominium association. Today, we'll be discussing how associations can pay for their project. Let's get started. For any type of association expense, regardless of the size, there are three ways an association can pay for that project. The first way to pay for a project is through the use of the association's cash reserve. This is the most basic and preferred method and the method people are most familiar with. For example, if an association knows its buildings will need to be repainted in 10 years, it would start assessing and reserving for the project so that in 10 years, it has funds set aside to complete the project. Unfortunately, and quite commonly, as Relyne mentioned, associations either don't reserve adequately or encounter unexpected projects. For example, very few associations have put aside reserves for replicating projects. Or it even considered energy savings projects like photovoltaic systems. If an association does have adequate cash reserves to pay for its project, it can either special assess individual unit owners, or it can obtain financing via a loan or a lease. In the case of a special assessment, individual unit owners must come up with their share of the project cost. For example, if the association is purchasing a photovoltaic system for $1 million and there are 100 owners, each owner would need to come up with around $10,000. Individual owners could use their personal cash reserves or obtain personal financing. In the case of a loan or a lease, our third option, the association applies for financing. Moving ahead to our next slide, please. So why do associations choose to finance instead of special assess? The biggest reason is because it lessens the initial impact on individual unit owners. We know there are many unit owners who are on fixed incomes or might be retired, and it may be difficult for those owners to come up with a large special assessment. The loan or lease spreads the cost over the term of the facility. In the example of the $1 million photovoltaic system, instead of each owner coming up with a $10,000 special assessment, the cost could be passed on to owners in the form of $100 monthly maintenance increases, spread over 10 years. Many people in the industry may be familiar with loans to associations. However, we also wanted to take this opportunity to share another financing option most people are less familiar with, and that is a lease. A lease is a rental agreement for use of specific equipment. Next slide, please. Before we explain some of the advantages of a lease versus a loan, I wanted to share some examples of what types of projects can be leased. As you can see on the right side of our slide, any item on a reserve study can be financed with a loan. But as you see on the left side, only equipment that can be removed from the property can be leased. For example, the photovoltaic system we discussed earlier for hot water systems, heat pumps, computer systems, gym equipment, basically any equipment that can be removed from the property may qualify as a lease. Next slide, please. There are some important differences between a lease and a loan. I'll start with a loan again. So for an association to obtain a loan, it typically must obtain ownership approval as required by 514B or the association's governing document. In the case of a loan, the association owns the equipment or improvements. Because the association is a nonprofit entity, it could miss out on potential tax credits relating to the equipment or improvements being purchased. And at the end of the loan, the loan is fully repaid with no balance due. For a lease, ownership approval may not be required. This can be particularly helpful if you're in an association that's large or has low owner occupancy rates, as it can be difficult in those situations to obtain ownership approval. If the equipment being financed is eligible for tax credits, the lease and company, for example, Banca Hawaii, may be able to pass along the tax credit savings to the association in the form of reduced monthly payment. At the end of the lease, the association would purchase the equipment at their market value from the leasing point. At this time, I'm going to hand it over to Randy and he's going to share an example of how leasing equipment could result in reduced monthly payment. Thanks, Eric. So let's go ahead to the example of exactly what Eric had mentioned already. So we're going to continue with that same example that he provided. We're looking at a million dollar for affordable tax system. So we're going to first talk about the loan side. So that's the right side of the column. So with the loan, as Eric mentioned, associations are all nonprofit organizations. They wouldn't be able to take advantage of any federal or state tax credit. So with that being said, the loan, you're basically financing the entire project at a million dollars. Now with the million dollars, see we amortized the loan for over 10 years, that monthly payment comes out to be about 10,125 dollars. The benefit is at the end of the loan is completely paid off. The equipment is all clean, clear by the association. Now this is what it will take system, solar hot water. Those types of equipment sometimes have tax advantages. So in this situation with a PV system here, the bank as the lessor over here basically, has the advantage of taking the 24 and a half percent state tax credit. So effectively, it already immediately cost to the system a million dollars to down to $785,000. So as you see right off the bat, that cost comes down dramatically. And what we do is we pass it along as rental savings in the monthly payment. So instead of the 10,125, it goes down to 7,000 over the same 10 year period. But here's one of the key differences at the very end of the end year lease. What happens is the association has many to go ahead and buy the equipment at whatever the fair market value is at that time. So we cannot find it in the lease, but what we can do is kind of give an indication of what it might be. And again, it's negotiated at the end of the end year. Let's move on to the next slide, please. So we want to just talk about ratings and say, hey, what is it? Hey, go ahead for an association to buy for the loan itself or the lease. And so I'm going to list some of these key metrics that most banks look at. So number one is delinquency. So for a strong association, we want to make sure that based on the number of units that there's at least 10% or less of unit owners that are past 30 days in terms of their maintenance fees or special assessments. And in honest, in truly what we rather have under 5%, right? Second thing we look at is the concentration of ownership. What we want to make sure is that based on the ownership base that no owner owns more than 10% of the total amount of units in the building. If there is something that work can talk a little bit more about it. The next thing we look at, kind of take a very macro look at the ownership base just to make sure that the owners itself has the ability to absorb that increase in the maintenance fees in order to make that monthly payment or the loan or the lease itself. And then the last thing we do look at the reserves. The reserve study windows is taking a look at all the capital expenses that's expected for the building over the next 20 years. Eric mentioned earlier, what we do is we want to make sure that the association itself has the cash in hand basically cover the immediate projects that are coming up and as well as the projects coming over the next 20 years. Let's go on to the next slide. So say we have some of these deficiencies, maybe reasons for the bank to go ahead and decline the loan. So let's talk about the first one and what are some solutions to get over that? Now say the delinquency is hot for whatever reason, right? What we would recommend is looking at some of those more stale and older delinquencies. If it's truly not collectible, write it off, right? Go ahead, write that off, not collectible. Even though some boards wants to keep it on, so it kind of reminds them, hey, you got to collect from so and so. But if it's not collectible, that's to just go ahead and keep it. Next is to have a very active collection policy. Working with your ownership, working with your board association attorney and everything, making sure that you have a very robust active collection policy that everyone knows that if you are delinquent, there are milestones to hit in order to make sure you cure that balance. And then of course the last one, which most boards really don't want to do, but through 514B, the board does have the right to foreclose very delinquent. There's a process that's entailed with that at the association with worker attorney, no hand attorney. Now, I mentioned this earlier, one of it is the high concentration in terms of ownership. Now, whenever we see that, the reason why it's important to the banks is that if that one owner, whatever reason, runs into financial trouble and all of a sudden unable to make the maintenance fee payment, you really can place a huge burden on the rest of the other owners that are in the building. So when we do a loan, we also take that into consideration. And what we may ask for is additional financial information of that one individual unit. Just so that we make sure that we think that they will have good financial capacity service alone, as well as of course, stay current with the maintenance fees. Then the third one that I want to talk about that's possible reason for definition is if the association is asking for the bank, can we amortize the loan longer, right? Make that monthly payment less. And it is possible. The way we structure the loans though, is that we structure the amortization or the repayment of that loan based on the useful life. Now, if you are asking us to do a photovoltaic system and asking us to finance this over 30 years, most banks will say no, right? Although it may last that long, you don't know for sure. And so we don't always amortize the loans for useful life, right? We're gonna have to put a little bit of cushion in between. So a 10 or a 15 year is much more reasonable. And if you think about it, it makes sense, right? What we don't want the board to have is to be paying two loans on the same improvement, right? Because we amortized it too long. We wanna make sure that that situation doesn't ever. And then finally, I just wanna go ahead and bring up that last one, ongoing and pending litigation. So if there is litigation going on, whether it's between owners, between the board, maybe the developer is still involved, what we wanna make sure we understand is what the litigation is about. And we try to frame out what that potential financial risk that might be involved with. And so if we can get a good handle on understanding what is going on and what the risk may be, we may be able to overcome the potential litigation and be able to provide that loan or lease or the associations. And then with that being said, those are some of the solutions for some of the key definitions that we do see. It doesn't mean no, but we try to find ways to make it more for the association. Okay, so I have a question. Oh, go ahead. So if they do a lease and say your PV system, it's like 20 years, will the lease term be back 20 years? It depends. It can be as long as up to 20. Okay, so say it's 15 years and they have the option to purchase it, right? But we all kind of know that the PV system doesn't last forever, right? So would you be looking at their reserves to see if they're putting money aside to even purchase it or to even buy into another one, whichever way they're gonna do it? Is that something that we take a look at as well? We could, absolutely. You bring a very good point, right? If they know at the end of that lease, whether it's 10, 15, 20 years, whatever they decide, it is a good practice to go ahead and start reserving a certain level of amount that they expect what their purchase would be at the very end. So it would not be a bad practice. So even this PV system might last longer than that in 15 years, right, really? So it makes sense for them to buy it out. Because they would still have to have money to buy it out after that term. Correct. So they still need to put money aside in their reserves as to what they're gonna do with it at the end of that term. Absolutely. The other option, of course, that we've seen as well is maybe at that point in time, they may take a loan to buy it out, period. But again, you do that, you'll end up going ahead and we're gonna have to get the ownership approval to go and get the loan. Yeah, and yeah, my opinion wouldn't be that good because the PVs don't last forever. No, exactly. And the technology is changing, you know? So buying an old system, we wouldn't be that great of an idea. I'd rather try to get into a newer system. But I think the lease program is really a good viable option for a lot of buildings because also with the lease, you're paying for your usage today on whereas a special assessment, you're paying for it upfront. And say you could be selling it, you don't know what's gonna happen in two years. You might have an opportunity to sell it. But you've already uprutted the cost via a loan. So somebody else is gonna benefit from what you've paid for. So those are the other plus and minuses with a loan versus a lease. I think practically what we've seen going back to your question about people buying it out at the end of the term and then maybe not having the money to do it is usually that equipment and how we set the amortization is near the end of its life. So it's usually a pretty small dollar amount at that point. Practically speaking, we've done a number of these and at the end of 10 years, we've talked about PV equipment that's pretty worn at that point. And so our fair market values have been something like in the range of a full of lease payment. When you talk about reserving, it's not like you're necessarily having to reserve for a new PV equipment to buy at our fair market value. Yeah, pretty nominal amount. They would have to start placing money into reserves, eventually probably purchase a new system because they do only last some amount of time, right? Yeah, unless they want to once again. Have you had some experiences where they have some association has opted to release it again or release a brand new system versus buying it out? You know, I think what we've seen is we've seen people come back and do a second lease, that's kind of been the most common when it's gotten to the end of the life. But usually that was even after they purchased our market value from us. So maybe it was a 10 year lease and then at around year 15 as an example, they come back for a new system at that time. Yeah, so I haven't seen it directly for PVs yet. Most of these PV systems still kind of hitting that 20 year life mark, right? But we have seen it for like chiller systems, HVAC systems, solar hot water, not solar hot water, but the regular hot water system. Where they've done it, 20 years there, they come back to us and release it again for that same equipment. I wonder how it would work? Cause I know some people have on the high rises, they have their boilers on the top, right? And they've also gotten some of the energy credits as well. So that would that energy, white energy credit would be applied to the balance of the loan and offset it, the credit that they get. Cause I know one building got like one of your 50, it was a big dollar amount. I was like, wow, that was huge. So with that money that you get from Hawaii energy, just be applied to the loan, would you guys take that and should we do some loan or lease or whichever one? Is that how it would work? Was that credit from Hawaii energy? Was that on an existing system or that was purchasing a new system? Putting in a new one, cause it was all about energy efficient. So they were putting in a brand new system. Right. So in that case, the way it works is essentially we can factor in that tax credit into our pricing. And so monthly payments on a going forward for the association would be a lot less than if it didn't achieve those tax credit. Right. Wow. That's a lot of opportunities for condos, for boards to really look at. It's a little bit of a complicated topic cause a lot of people aren't familiar with what tax credits are available, but we have a pretty good energy renewable department within Bank of Hawaii. We send them to go back to and ask those questions and they help us with, oh, you know, this state tax credit might be available, or this federal credit might be available, whatever that case might be. If people have questions and they're just not sure, you know, we can go back and kind of figure out what kind of credits might be available that we might be able to pass along in the form of a lease. How long has Bank of Hawaii been doing this lease program? About 20 years. I've been here about, you would know better than I would. Yeah. It's been here for a while. We have our leasing department 20 plus years already because we've been doing this for businesses. Wow. As I know for some of us, we only found out about it recently, like a couple of years ago, you know? Yeah. At one of our seminars, someone brought it up and we're like, what? So that really piqued our curiosity and also our relationship with you guys about these different types of programs, financing options that are available to condos. I think a lot of boards are really attracted to the avoidance of ownership approval, particularly if it's a small amount, you know, say a few hundred thousand, but for a really large condominium, that process of going through ownership approval for a loan is just so daunting for what's a relatively small amount on a per unit basis. Those are the ones that have really been attracted to the lease option. Help some avoid all that work. Yeah, it does. It does. Just to try to get your proxies turned in for an annual meeting is a chore in itself, you know? So I can understand that reasoning. Okay. So when you ask about the 10%, one entity that owns at least created or somewhere with that 10%, so are you going to be asking for that individual person's financials as well? It's possible. It is possible. Well, we try to understand a lot of times it's because someone buys it for investment purposes. And so we'll try to make sure we understand what the logic is to have such a large ownership basin. And then if it is quite sizable, you know, you may go ahead and ask for additional financial information on that company or on that individual, just so that we want to make sure that they're on good financial standing. I think that practically speaking, we don't run into this a lot. The most part on the Minions in Hawaii are pretty diversified in their ownership, but every once in a while, we will run into that entity that owns a large share of the percent of common interests. And I can- What if you have a condo that has some of the ownership are in businesses, like LLCs rather than your standard individual person? Yeah, it's still the same question of just whether they own more than 10%. And there's a bunch of LLCs and they all own one out of a hundred units, let's say, or something like that. This issue doesn't come up. And I think just so everybody understands it from the bank's perspective, essentially what it is is our repayment source is people paying their maintenance fees. And when we have a hundred unit owners, it's very diversified. But if we encounter a situation where one owner say owns 25% of the units, if that person's having some financial difficulty, you might have a hard time getting your pay from the associate. So that's what those questions come from. Great, great, great. Wow, I'm really stoked that we did this. We did this today. Because it's really opening, I think it's really going to open a lot of doors or financing options for condos. Well, probably once we get the ad actual recording, we'll probably email blast it out for everybody so that they can have an opportunity to review it and at least be knowledgeable that, you know, there's some information from Condo Insider on your lease programs and your other financing program. I really want to thank you guys or thank you both for being on the show today and presenting what Bank of Hawaii has to offer. I really, really do appreciate it. I really do appreciate your support for a Hawaii Council as well that you guys have done over the years. Hope we can get back. Hopefully next year we can get back to in-person seminars that we did before because it was just so much more fun to see everybody in person versus through a camera, you know. Absolutely, we're looking forward to that and we missed the lunches too. I know, those are the added perk to it. Right, thank you guys for having us really. Okay, thank you so much. Is one of the last slides your contact information? Yeah, so that's... There it is, there it is. That is our team. So, yeah, anytime, any questions, what not? Thank you for supporting us as well, too. I'm more than happy to share our knowledge of the Association. Okay, so everybody, thank you for joining us today. We will send it out in an email blast to everybody so that they know that we have it in Condo Insider. They can always refer back to it when they have the opportunity or when that opportunity arises. And again, thank you, Randy and Eric, for being my guest today and have a safe and healthy Christmas holiday. I hope we don't go into another shutdown. Well, the Omicron, the first case hit today, right? In Hawaii. Yeah, so I hope it doesn't get out of control. Okay, so thank you very much and thank you everybody for joining me and we will see you next Thursday on another segment of Condo Insider. Thank you.